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Drilling California

IMPORTANT UPDATE: In May 2014, a few months after the publication of Drilling California, the Energy Information Administration downgraded their estimate of technically recoverable tight oil in the Monterey Formation by 96% — corroborating our analysis and criticism.

Written by PCI Fellow J. David Hughes and published in partnership by Post Carbon Institute and Physicians, Scientists & Engineers for Healthy Energy, this report provides the first publicly available empirical analysis of actual oil production data from the Monterey Formation, including from wells that have undergone hydraulic fracturing and acidization. It lays out some of the play’s fundamental characteristics compared to other tight oil plays, including geological properties, current production, production potential, and associated environmental issues.

Unlike previous studies looking at potential production and economic impacts, this report is based on analysis of real production data (compiled in the most comprehensive oil and gas production database publicly available) and should therefore help ensure that public policy decisions on the development of the Monterey are grounded in data, not assumptions.

Executive Summary

The recent growth in unconventional oil production from the Bakken (North Dakota), Eagle Ford (Texas) and other tight oil plays has drawn attention to the potential of shale in California’s Monterey Formation. Commercial oil production from the Monterey Formation is not new—more than a billion barrels of oil and four trillion cubic feet of gas have been produced from it since 1977, largely from conventional reservoirs. However, completion techniques like hydraulic fracturing which have made tight oil production possible from shale deposits elsewhere have not yet been widely implemented in the shale source rocks of the Monterey Formation.

In 2011, the U.S. Energy Information Administration (EIA) published a report by INTEK Inc. which stated that the Monterey Formation contains 15.4 billion barrels of technically recoverable tight oil (therein referred to as “shale oil”) —64 percent of the entire estimated tight oil resource in the Lower-48 United States at that time. This estimate was seized upon by industry groups intent on the development of the Monterey shale, and was used as the basis of a March 2013 University of Southern California (USC) economic analysis which projected as much as a $24.6 billion per year increase in tax revenue and 2.8 million additional jobs by 2020. It also raised alarm among groups concerned about the environmental and public health implications of hydraulic fracturing, acidization, and other advanced well stimulation technologies.

This report provides the first publicly available empirical analysis of oil production data from the Monterey Formation, utilizing the Drillinginfo database (widely used by the oil and gas industry as well as the EIA). It lays out some of the fundamental characteristics of the Monterey compared to other tight oil plays, including geological properties, current production, and production potential. The results of this analysis will be useful for informing public policy decisions surrounding the development of the Monterey shale.

Prospects for Tight Oil Production in the Monterey Formation

Much of the enthusiasm about developing tight oil in the Monterey comes from the success of tight oil production in the Bakken and the Eagle Ford plays of North Dakota/Montana and southern Texas, respectively. Geologically, however, these two plays are very different from the Monterey:

The target strata in the Bakken and the Eagle Ford plays are less than a few hundred feet in thickness and are flat-lying to gently dipping. The shale deposits of the Monterey are much thicker and much more complex, with target strata up to 2,000 or more feet in thickness, and at depths that can range from surface outcrops to more than 18,000 feet within a span of forty miles or less.

The Bakken play is spread over a potentially productive area of as much as 20,000 square miles, and the Eagle Ford play covers roughly 8,000 square miles. The Monterey tight oil play encompasses less than 2,000 square miles.

The Bakken and Eagle Ford shales are approximately 360 and 90 million years old, respectively, and were deposited on a relatively stable platform; as a result they are thin and widespread, and hence are relatively predictable. The Monterey is 6-16 million years old and was deposited rapidly in an active tectonic regime; as a result it is thick, of limited areal extent, and structurally complex, and hence is much less predictable.

An analysis of oil production data from the Monterey Formation reveals the following:

While tight oil plays generally produce directly from widely dispersed source rocks or immediately adjacent reservoirs—as is the case in the Bakken and the Eagle Ford—this is not the case in the Monterey Formation, where most production has come from localized conventional reservoirs filled with oil that has migrated from source rock.

1,363 wells have been drilled in shale reservoirs of the Monterey Formation. Oil production from these wells peaked in 2002, and as of February 2013 only 557 wells were still in production. Most of these wells appear to be recovering migrated oil, not “tight oil” from or near source rock as is the case in the Bakken and Eagle Ford plays.

The EIA/INTEK report assumed that 28,032 tight oil wells could be drilled over 1,752 square miles (16 wells per square mile) and that each well would recover 550,000 barrels of oil. The data suggest, however, that these assumptions are extremely optimistic for the following reasons:

Initial productivity per well from existing Monterey wells is on average only a half to a quarter of the assumptions in the EIA/INTEK report. Cumulative recovery of oil per well from existing Monterey wells is likely to average a third or less of that assumed by the EIA/INTEK report.

Existing Monterey shale fields are restricted to relatively small geographic areas. The widespread regions of mature Monterey shale source rock amenable to high tight oil production from dense drilling assumed by the EIA/INTEK report (16 wells per square mile) likely do not exist.

Thus the EIA/INTEK estimate of 15.4 billion barrels of recoverable oil from the Monterey shale is likely to be highly overstated. Certainly some additional oil will be recovered from the Monterey shale, but this is likely to be only modest incremental production—even using modern production techniques such as high volume hydraulic fracturing and acidization. This may help to temporarily offset California’s long-standing oil production decline, but it is not likely to create a statewide economic boom.

Why These Findings are Important

The March 2013 study from the University of Southern California suggested that the development of the Monterey shale could—by 2020—increase California’s Gross Domestic Product (GDP) by 14 percent, provide an additional 2.8 million jobs (a 10% increase), and provide $24.6 billion per year in additional tax revenue (also a 10% increase). This study was based on estimates that development of the Monterey shale could increase total California oil production as much as seven-fold. Given the unrealistic nature of the original EIA/INTEK Monterey shale estimates, such production growth estimates are unfounded. Moreover, an examination of USC’s oil production estimates reveals that they include unrealistic assumptions about the total production growth possible from the Monterey and the number of wells that would be required to increase production to the levels forecast. Hence the economic projections of the USC study must be viewed as extremely suspect.

Environmental concerns with development of the Monterey shale are centered around hydraulic fracturing (fracking), the main completion technique used in other tight oil plays. Acidization completions, using hydrofluoric and hydrochloric acid, are also of concern. It is certain that hydraulic fracturing and acidization completions have already been used on the Monterey shale, yet an analysis of production data reveals little discernible effect of these techniques in terms of increased well productivity. Many oil and gas operators and energy analysts suggest that it is only a matter of time before “the code is cracked” and the Monterey produces at rates comparable to the Bakken and Eagle Ford. Owing to the fundamental geological differences between the Monterey and other tight oil plays, and in light of actual Monterey oil production data, this is likely wishful thinking.

For all of these reasons, this analysis suggests that California should consider its economic and energy future in the absence of an oil production boom from the Monterey shale.